Welcome to the new Becker-Posner Blog, maintained by the University of Chicago Law School.

03/13/2006

The Dubai Ports World Fiasco--Posner

Last August, Becker and I blogged about the effort of a Chinese oil company to buy the American oil company Unocal. That effort failed because of fears that China would use control of the company to the detriment of the United States. Becker and I thought those fears chimerical. In effect, by purchasing Unocal, the Chinese would have been giving us a hostage. Moreover, if as feared (groundlessly) they ordered Unocal to sell all its oil to China, the only consequence would be that whatever supplier of oil to China Unocal would be replacing would now have unsold oil to sell to the United States. Our oil supply, and oil prices, would not be affected.
Defenders of the thwarted transaction by which Dubai Ports World, a company owned by the government of Dubai, one of the United Arab Emirates, would (through its purchase of the British port operating company Peninsula & Oriental Steam Navigation Company (P&O)) have obtained control over loading and unloading ships at a half-dozen major U.S. ports argued that the opposition to the transaction was as blatant and misguided a display of xenophobia as the opposition to China‚Äôs acquiring Unocal. But the two cases are not symmetrical. The opposition to the Dubai deal had nothing to do with fears that Dubai Ports World would deprive the United States of access to an essential raw material or otherwise harm the United States economically. Nor, I think, had the opposition much to do with fears of foreign investment in general, since the transaction was between two foreign companies (P&O and DP World). Protectionism is not a compelling explanation for opposition to the sale of assets by one foreign company to another even if some of the assets are located in the United States. Toyota has factories in the United States, but if BMW bought Toyota, who would care? The defeat of the DP World transaction was the result of a groundswell of American popular opinion (though egged on by politicians and the media) that is more plausibly interpreted as anti-Muslim and anti-terrorist than as protectionist. Dubai is an Arab nation with pre-9/11 links to al Qaeda, and U.S. port security is notoriously lax. No serious person thinks that Dubai would actually connive in a terrorist attack on the United States. The fear is rather that an Arab company is more easily penetrated by Islamic terrorists than a non-Arab one.
The fear may be exaggerated, but many of the arguments made in defense of the Dubai deal seem dubious. For example, it was argued that since British, Singapore, Chinese, and other foreign companies already control some port operations in the United States (P&O being one), the cat is out of the bag. But the companies of non-Islamic nations are no more likely to be penetrated by terrorists than a U.S. company is. It is not, as some defenders argue, "racist" for Americans to differentiate Islamic nations and peoples from other nations and peoples with regard to security precautions. It is merely realistic. (Many of those defenders in fact support racial and ethnic profiling as a rational police and counterterrorism practice.) Nor is it a complete answer to the opposition to point out that the employees at the ports that Dubai Ports World would have operated are Americans and would be unlikely to be replaced by Arabs or other foreigners, or that the security of U.S. ports is the responsibility of the Coast Guard and of U.S. Customs and Border Protection (both components of the Department of Homeland Security) rather than of the port operator. The local managers of DP World doubtless provide a stream of information to the company's headquarters in Dubai concerning various aspects of their port operations (including personnel), and this information might be valuable to anyone contemplating a terrorist attack on the United States who might have access to the company‚Äôs files. And doubtless personnel from headquarters visit the ports from time to time on business. Apparently the investigation made by the U.S. government before approving the transaction was superficial.
I would have to know a lot more than I do about port security to be able to evaluate the risk that allowing DP World to control U.S. port operations would create to national security. The risk may be slight; but even so, running a slight risk of catastrophic loss is worthwhile only if the benefits of the risk-taking are considerable. The benefits would have been slight had the government handled the matter more adroitly. Apparently DP World, in buying P&O, was not particularly interested in the latter's U.S. operations. So when the proposed acquisition was first submitted to the U.S. government for approval, our government might quietly have suggested (maybe it did, though there is no indication of this) that DP World spin off the U.S. operations that it was acquiring to an American company. Because this was not done, and DP World is being depicted as having backed off from acquiring the U.S. port operations because of fierce grass-roots American opposition, concern has been expressed that we are poisoning our relations with the Islamic world in general and Dubai in particular, and even discouraging foreign investment in the United States by non-Islamic countries.
This concern seems overblown. Take the last point first. Because of our large budget deficit, the world is awash in dollars. The companies holding those dollars are avid to invest in the United States, either by helping to finance our deficit or by acquiring U.S. assets. They are not likely to be deterred by a security concern focused on an Islamic nation. Some Islamic nations may be angry with us; but those nations do not invest heavily in the United States. Tiny Dubai can hardly afford to retaliate against the United States, to which it looks for protection against the stronger nations in its region, such as Iran. Nor for that matter can Saudi Arabia. Between us and the Islamic world (outside of frankly hostile nations such as Iran and Syria) the economic and security dependence is mutual. Moreover, the ruling and business classes in these nations understand that the United States is a democracy, that our government must therefore be responsive to public opinion, and that Islamic terrorism and fanaticism, the French riots, and the riots over the Danish cartoons, have increased the hostility of Western populations to Muslims. Demonstrations of the indignation of the American people over Muslim misconduct may even cause some Muslim leaders to rein in their followers.
Western hostility to radical Islam was one of several factors that made the government's defense of the DP World acquisition a distinctly uphill struggle quite apart from legitimate security concerns. Another such "extraneeous" factor was our government‚Äôs surprising neglect of port security, which has made our ports seem the weakest link in our defense against terrorist attack by means of weapons of mass destruction, weapons that could probably be brought to the United States only by sea. Another factor was the poor reputation of the Department of Homeland Security, which is responsible for port security; the Department's assurances that the DP World acquisition would not undermine national security were bound to fall on deaf ears. Then too there is suspicion, based on our lucrative commerce with Dubai and on our failure to require strong counterterrorist measures by our chemical industry, that our government trades off terrorist risks against business interests on terms too favorable to the latter.
I have expressed concern before in this blog and in other media about what seems a crisis of competence in U.S. government. For reasons probably rooted in the sheer complexity of modern society, to which our governmental structure may not be well adapted, we have experienced in recent years a series of policy fiascoes, many of which seem to reflect an inability to plan ahead. In the case of the DP World deal, this inability was expressed in the failure to foresee the public reaction to the deal.

Comments

You can follow this conversation by subscribing to the comment feed for this post.

Regarding competence, these statements trouble me. The Iraq war might have cost more than people were told. People (military and other) might have been pushed out or isolated who said otherwise. We possibly could have gotten Bin Laden at Tora Bora but did not. And for years and years, Cheney and Bush have never been real big conservationists of oil. The U.S. is not addicted to oil. Perhaps the fed govt did not deal with the media on Dubai ports because they were working overtime on Cheney and his hunting accident.

Bush in 2006 State of Union:

As we make progress on the ground and Iraqi forces increasingly take the lead, we should be able to further decrease our troop levels. But those decisions will be made by our military commanders, not by politicians in Washington, D.C.

Here's the thing. When you only inspect less than 5% of the containers arriving at US ports, 99.999999999% of the risk is created in the supply chain outside the US - at the point where the container is loaded or trans-shipped. Those ports are all run by foreign companies, many of them by DP World. Talk about solving the wrong problem.

This is just one more example of spending huge amounts of political, physical, moral and financial capital since 9/11 on stuff that doesn't make us one little bit safer. The last four years have been the biggest boondoggle in the history of boondoggles.

What are the economic deterrents for Muslim living in the US to pro-actively cooperate in the war on terrorism? Wouldn't 'informal' barriers to FDI investments of Middle Eastern firms that might be more likely to hire Muslims living in the U.S. act as an economic deterrent?

On a different note, what percentage of Americans do you think would support raising money for homeland security by targeted taxation on Middle Eastern ethnicity individuals living in the U.S.? I think the percentage is quite high. It gets even higher after people are disappointed by their fellow Muslim citizens response to controversies like Danish cartoons and their lack of response to videos of westerners being killed in the broader Middle East.

Shallow, superficial and misguided as this sounds - bear in mind I am making a statement about broad public opinion here:

I don't believe that you have to watch Michael Moore's films to form an opinion that the Bush administration is in the pocket of "Big Arab Oil." To me, Dubai is as tied to "Big Arab Oil" as any other entity on the planet. So, would we be offended if Dick Cheney pushed a(nother) deal promoting Haliburton?

I think a large part of the groundswell opinion against the Dubai deal is that it sounds like Dubya passing out pork and strategic control to his Arab buddies, never mind that they are paying "fair market value" or any of those other facts... this is opinion (outrage) that shut down this deal.

Good points in favor of being, at the very least, cautious of the greater implications of the DP World deal. As for the substitution effects of Unocal oil vs. that of other suppliers, Posner's argument that diversion of Unocal oil to China would only free up supply for the U.S. would be true if demand were stagnant. As it stands, China's oil appetite increases at a much faster pace than the U.S. Consider also the enormous costs of boosting production and it is certainly conceivable, in the short run, that a diversion of Unocal oil to China would provide less for the U.S.

I always wondered how the blowhards of the Republican party could call Clinton a liberal when the man was clearly to the right of Ronald Regan. It was George Washington, a real liberal, who warned us of the despots of the political party. "The alternate domination of one faction over another, sharpened by the spirit of revenge, natural to party dissension, which in different ages and countries has perpetrated the most horrid enormities, is itself a frightful despotism." Washington's Farewell Address. http://www.yale.edu/lawweb/avalon/washing.htm

If we had a liberal party in America, one would expect them to take a principled stand in favor of free trade. "It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy...What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage." The Wealth of Nations, Book IV Chapter II.

But we don't have a liberal party, one party wants an official state religion; the other want only to be in power. "There is an opinion that parties in free countries are useful checks upon the administration of the government and serve to keep alive the spirit of liberty. This within certain limits is probably true; and in governments of a monarchical cast, patriotism may look with indulgence, if not with favor, upon the spirit of party. But in those of the popular character, in governments purely elective, it is a spirit not to be encouraged. From their natural tendency, it is certain there will always be enough of that spirit for every salutary purpose. And there being constant danger of excess, the effort ought to be by force of public opinion, to mitigate and assuage it. A fire not to be quenched, it demands a uniform vigilance to prevent its bursting into a flame, lest, instead of warming, it should consume." Washington's Farewell Address.

Sorry Collestro, I don't agree with your sentiments.
Clinton was hardly to the right of Reagan. A 1994 Congress made him look more conservative than he was. In reading our founding fathers biographies, I find it hard to classify them in either party. I hardly think that the Reps want a state religion.

Meanwhile, both parties are using emotional political rhetoric to advance their agendas. Democrats want ot look strong on security, their weakness in the last election. Reps want to keep the corner they have on security-so we get a lot of blather about illegal immigration and now port security.

The simple fact is that anytime America becomes protectionist in its thinking, it is not good for Americans. Free trade is an integral part of our society. While we do not always hit the ideal of free trade, to lose sight of it is very improper.

Bush had a good idea here with his 45 day cooling off period. Maybe then we could have had a good look at port security and the company that was going to buy the ports. If we do not let foreigners invest in America, they don't ave a good reason to see us prosper. I think you also will see asset values in America decrease if you limit foreign investment.

Port security is a bogus issue. 9/11 did not involve smuggling in a weapon of mass destruction. It depended on catching the U.S. off-guard (or more precisely, the U.S. trying to achieve security through obscurity by not informing the public and pilots well enough of previous thwarted airline hijacking crashing plans).

If a terrorist organization has a weapon of mass destruction that can be fit into a shipping container, it is too late at that point. It could be brought in by a thousand different ways (mini-submarine, cigarette boat, plane). Tons of drugs make it to the streets of the U.S. every day.

Only nuclear weapons are real threats - no one has every been very effective at weaponizing chemical or non-smallpox bio weapons without a huge military operation. If terrorists get smallpox or enough fissionable material, forget port security, we've lost, they'll find a way in.

The goal is to deny terrorists access to smallpox or fissionable material outside the U.S.

We spend billions of dollars on useless security inside the U.S. now. It is unclear if we are seeing a return on the investment.

I'm not sure I agree with Judge Posner on this issue for three reasons.
First, the proposed deal was vetted by a committee made up of various representatives of the government, specifically, the Defense Department and the Department of Homeland Security, among others. The result of that process was approval of the deal despite the security concerns that have now become a matter of public record.
Second, since 9/11 the policy of the government has been to "extend" port security outward, i.e., to first engage in the inspection of cargoes in foreign ports so that, to the greatest extent practicable, potential threats can be dealt with in the first instance on foreign soil.
Finally, as has been readily conceded even by those in opposition to the deal, port security has and will remain in the hands of the U.S. government and its relevant agencies. The deal itself was intended to tranfer only the commercial aspect of port operations.

I have not yet seen any explication of just what type of control over operations the port operator actually exercises or what intelligence a port operator could provide to a terrorist or other enemy. I thought that all the "hands on" work at seaports was conducted by members of the Longshoremens' Union (whose exact name I forget) under work rules over which Port Operators have little control.

Security (deciding which few of the many containers to search, and How) seems to be controlled by agents of Customs and Border Security or by the Coast Guard.

Perhaps a port operator of both a transshipment port and a US port could provide counterfeit documentation or disguise the origin of a container, but no one has actually said this.

The Dubai Ports World deal is nothing more than a casualty of the "fear, paranoia, and confidence crisis" that now exists in the U.S.and the world. Or is it? If anything, a new style "IG Farbin deal" has been stopped in its tracks. (just a point of history- IG Farbin, a subsidiary of the Abwehr, bought up all rights to synthetic rubber production. Essentially killing all RD into synthetic rubber production by US Companies. Crippling the US war effort in the opening phases of WWII.) But at the time, everyone thought it was a great busines deal.

In order to provide the security everyone expects would require that each and every containerized cargo carrier coming into the U.S. be inspected. A virtual impossibility, no matter who "owns" the port operation. Be fore-warned, one of these days one of those things is going to go up. No matter who owns the port. The only real rational plan is to figure out how to minimize causalties and loss when it does happen. Something made much more difficult when owned by a foreign firm.

As to the DPW, tough luck guys, it's a new and even more dangerous world than any of us can possibly imagine.

The point I was trying to make is that a liberal politician should have stood up and spoke in favor of the port deal. Free trade and free enterprise are the fundamental underpinning of a liberal philosophy; and a free society. We have members of the Democratic party, but it is very difficult to find a liberal holding office.

As for Clinton, remember Rickey Ray Rector, a black man executed in Arkansas during the 1992 presidential campaign of then Governor Bill Clinton? Rector had shot himself at the time of his arrest and had sustained organic brain damage that reduced his intellectual capacity dramatically. He is reported to have spoken of deferring eating part of his last meal until "later" - after the execution.

Right before a huge primary election, during 1992 presidential campaign, then Governor Bill Clinton flew home to Arkansas to execute Rickey Ray Rector. You can call a man who kills a retard man lots of things, but you canít call him a liberal.

The biggest casualty of the entire Dubia Ports deal has been the truth. Almost every major newspaper, both liberal and conservative, with the notable exception of the LA Times, has misreported the facts of the takeover deal. The New York Post went so far as to refer to the deal as a contract between the Bush Admninistration and the UAE. As a maritime attorney who does know something about port security, I have been dismayed since the first TV report I saw three weeks ago. The facts are that one foreign (UK) corporation had sold its marine terminal operations to another foreign (UAE) corporation. Dubai Ports would not be operating any "ports", as has widely been misreported, but rather would be operating marine terminals within certain ports. In the port of New York/New Jersey, for example, the terminals at issue actually move only a small percentage of the cargo that passes through New York harbor. The ports would still be owned by the local municipality or port authority. The terminal would still employ union labor and would be subject to the same security that the Coast Guard, US Customs, and the local port authority would presently provide. A terrorist's cargo has no greater or lesser chance of entering the US through a terminal operated by Dubai Ports than any other terminal; the load port, over which the US has very little control, is where a terrorist's cargo would have to be detained.

Nope, would never call you a retard. But I would have liked to see any politician step in front of the protectionist freight train Schumer started.

Debating the political stripe of the former President does us no good here. Clinton made decisions not on what he believed, but on how polls behaved. If he didn't execute the guy, he would have been painted as soft on crime and he couldn't afford that.

I agree with Prof. Becker that the consternation has little to do with protectionism, that it has more to do with security. I disagree with the claim that something is not racist because it is realistic. Prof. Becker's book proved that racism in a specific context (hiring) does not help black labor or white capital, but the book also showed that racism in the employment context might help black capital and white labor. The point is that racism is often grounded in reality (though not always nor necessarily in efficiency). They are not mutually exclusive. The heightened fear and need for security can very well be rational and racist. What I hope we do more of in the future is admit the correlation between racism and other more desirable ideals and seriously consider how to optimize our addresses to both.

Just as an aside, given the temper of times and the current situation, here's a little something that everyone ought to keep in the back of their minds: "In Bellum, Leges silent" It may very well explain Congress's actions now and in the forseeable future.

This time, I agree more with Professor Becker than with Judge Posner. Also, I noticed an interesting asymmetry with respect to Becker and Posner's respective positions on 'human' vs. 'economic' protectionism:

While Becker is adamantly opposed to all forms of economic protectionism, he is willing to tolerate other types of protectionist measures in order to stem the flow of illegal immigration. Posner, in contrast, seems more willing to tolerate some economic protectionism (in exchange for enhanced security), but is more skeptical of immigration controls.

As I see it, it would be more principled to favor (or oppose) the free flow of all forms of capital, whether it be goods, services, or peoples.

It is certainly principled to favor the free flow of all forms of capital goods, services, or peoples. A moral person cannot oppose it. You are either for free trade, or in favor of third world poverty. There is no middle ground.

Collestro, I hope your'e pointing out an error in the application of the 'Law of the Excluded Middle". Not too mention, the fallacies of false Dilemma, Dichotomy, and Bifurcation. It would be nice if the World and its Economy (Capital & Labor) operated as a non-zero sum game, but from what I've seen it operates as a zero sum game.

As for issues of National independence, security, and well being; we cannot allow a superficial sentimentality cloud the important issues of policy.

Is there a cause to be concerned that DPW is a government owned company, as opposed to a publicly traded company? This would be especially important when the government that controlled the company was not democratic, and therefore not accountable.

A publicly traded corporation would have understandable motivations (to make profit). Could a non-democratic government corporation be considered a rational actor?

Right before a huge primary election, during 1992 presidential campaign, then Governor Bill Clinton flew home to Arkansas to execute Rickey Ray Rector. You can call a man who kills a retard man lots of things, but you canít call him a liberal.